In a ruling issued at the end of January 2017, the German Federal Supreme Court (“Bundesgerichshof“, “BGH“) has tightened the requirements for the liability of tax advisors in a corporate crisis.
In a previous ruling of 2013, the BGH had specified the requirements for the liability of a tax advisor in the crisis of a company in a rather restrictive manner as follows:
- Which tasks the tax advisor has to perform depends on the content and scope of the mandate given.
- The tax advisor is obliged to deal with the tax law points which must be observed in order to carry out the mandate given to him in accordance with his duties.
- Only within the limits of the permanent mandate drawn up as a result of the aforementioned conditions must he also instruct the client without being asked about the tax law issues arising during the processing.
- One of the tax advisor’s secondary contractual obligations is to protect the client from damage (§ 242 BGB) and to point out wrong decisions which are obvious to him.
- Measured against these principles, it is not the task of the tax adviser commissioned with the general tax advice of a GmbH to point out to the company in the event of an over-indebted balance sheet that it is the duty of the managing director to carry out a check to see whether insolvency has occurred and, if necessary, to file for insolvency proceedings.
With the express partial abandonment of this jurisdiction of 2013, the BGH, in its ruling from January 2017, decided that a tax advisor who prepares the annual financial statements for a company can be held liable if he fails to point out to the executive bodies the risks resulting from the deficit not covered by equity (§ 268 (3) German Commercial Code (“Handelsgesetzbuch“, “HGB“) and has not pointed out that this might indicate a ground for insolvency.
In this context, the tax advisor who prepared the annual financial statements is initially liable for breach of duty under his contract if the annual financial statements are wrong, e.g. because going-concern values were wrongly taken as a basis. However, the tax adviser is not obliged, without a special agreement, to determine on his own initiative the facts relevant to the forecast of the continuation of the business. Rather, the tax advisor must prepare the annual financial statements solely on the basis of the documents available to him and the circumstances known to him. However, according to the BGH, the annual financial statements are always wrong, irrespective of the scope of the tax advisor’s auditing duties, if, on the basis of the documents and information provided to him by the company and the circumstances known to the tax advisor – for example from a permanent mandate – the annual financial statements exceed the scope permitted under commercial law, i.e. if they violate commercial law requirements.
The existence of a ground for insolvency counters the normal presumption of a continuation of the company’s activities, but nevertheless – on the basis of a forecast of the overall situation of the company – accounting according to going-concern values may be permissible. However, such a judgement requires a concrete justification in each individual case. The mere fact that the company continues to operate despite the fulfilment of one of the insolvency criteria does not justify accounting at going-concern values. If circumstances speak against the presumption of continuation of § 252 Para. 1 No. 2 HGB, the tax advisor has the obligation to demand that the company draws up a special continuation forecast. However, liability shall not apply if the tax advisor has carried out the necessary checks and provided information, but the company expressly instructs him/her to nevertheless take going-concern values as a basis when preparing the balance sheet.
The BGH points to the (usual) legal consequence, according to which fault is presumed in the case of wrongdoings in the performance of the mandate (i.e. in this case the annual financial statements), i.e. the tax consultant bears the burden of proof for his own discharge. In contrast, the insolvency administrator must prove that the incorrect balance sheet was causal for the damage caused by the delay in filing for insolvency. Furthermore, a claim for damages existing according to this can be considerably reduced or even completely excluded as a result of a contributory negligence of the managing directors which can be attributed analogously to the company according to § 31 BGB. In addition, the BGH, referring to a ruling from 2008, clarifies that the tax advisor is also obliged to provide information outside of any limited assignment, if the risks are known to the tax adviser or are obvious to him or become apparent to him during proper processing and if he has reason to believe that his client is not aware of the risk.
The judgement consistently follows the line of the BGH’s ninth civil senate, which for years has lowered the requirements for the liability of, or contestability of, services rendered to executive bodies, consultants and creditors in a corporate crisis. It must be admitted, though, that, depending on the scope of the mandate, the tax advisor – as an outsider – is certainly aware (or should be aware) of the economic circumstances of the company and should therefore also resist the temptation to allow himself to be misused – in order to maintain the mandate – as a “fig leaf”, so to speak, for a positive company presentation which does not correspond to the facts.